Treasury and Fed launch $600 Billion Main Street Lending Program

Information has not yet been released on how businesses can access funds through the new programs, though applications will be made to participating banks, not the U.S. government. Below, we provide the latest information on what mid-sized, large businesses, and nonprofits (those with fewer than 10,000 employees) can expect as they seek to take advantage of new lending programs. This information is subject to change as Treasury and the Fed develops and releases additional guidance.

Main Street Business Lending Program

Through the Main Street Business Lending Program, Treasury will make a $75 billion equity investment to enable up to $600 billion in new financing for medium-sized businesses.

The program is designed for businesses with up to 10,000 employees or $2.5 billion in 2019 revenues. Notably, the program announcement does not specify a minimum number of employees that a business must employ in order to be eligible, despite the CARES Act originally targeting companies with a minimum of 500 employees. Such details could come later.

How Will the Program Work?

The Main Street Business Lending Program requires the establishment of two new loan facilities: (1) the Main Street New Loan Facility, and (2) the Main Street Expanded Loan Facility. Both Facilities will enable lending to businesses by eligible lenders.

Under both Facilities, the Federal Reserve will commit to lend to a single purpose vehicle (SPV). The Treasury Department will use $75 billion in CARES Act funds to make an equity investment in the SPV. The SPV will then purchase 95% participations in eligible loans from eligible lenders, with lenders retaining 5% of each loan. The combined size of the Facilities will be up to $600 billion.

The SPV will purchase participation until September 30, 2020, unless the Federal Reserve and Treasury Department extend the Facilities.

Who Are Eligible Borrowers?

• Businesses and nonprofits with up to 10,000 employees or up to $2.5 billion in 2019 annual revenues. A minimum size requirement (for example, over 500 employees) has not been established.
• Businesses must be created or organized in the United States or under the laws of the United States with significant operations in and a majority of employees based in the country. There is no limit on foreign ownership of the U.S. entity at this time.
• The recipient cannot be a debtor in a bankruptcy proceeding.
• Recipients must have incurred or will incur “covered losses” as a result of COVID-19, including reduced demand, unbudgeted medical expenses and unavailability of credit.

Borrowers may not also participate in the Primary Market Corporate Credit Facility. (See below.) Further, borrowers participating in the Main Street New Loan Facility may not participate in the Expanded Loan Facility and vice versa.

What Loans Are Eligible?

An eligible loan is an unsecured term loan made by an eligible lender. For the Main Street New Loan Facility, eligible loans are those originated on or after April 8, 2020. For the Main Street Expanded Loan Facility, an eligible loan is one that originated before April 8, 2020, and has been subsequently upsized.

New loans—or the upsized tranche of existing loans—must have the following features:

• 4-year maturity

• Interest rates on direct loans will need to reflect risk and market conditions but should not be higher than 2% per annum. Duration of the loan has not been established.

• Amortization of principal and interest deferred for one year
• Adjustable Secured Overnight Financing Rate of +250-400 basis points
• Prepayment permitted without penalty
• Minimum loan size of $1 million

• Lenders are authorized to charge borrowers certain fees at set amounts.
• For Main Street New Loan Facility loans: Maximum loan size that is the lesser of (i) $25 million, or (ii) an amount that, when added to the borrower’s existing outstanding and committed by undrawn debt, does not exceed four times the borrower’s 2019 earnings (before interest, taxes, depreciation, and amortization)
• For Main Street Expanded Loan Facility loans: Maximum loan size that is the lesser of (i) $150 million, (ii) 30% of the borrower’s existing outstanding and committed but undrawn bank debt, or (iii) an amount that, when added to the borrower’s existing debt, does not exceed six times the borrower’s 2019 earnings (before interest, taxes, depreciation and amortization)

How Will the Money Be Delivered?

• Under the program, eligible lenders include U.S. insured banks and saving associations.
• Primarily, the loans will be designed to be direct loans—made by the financial institution to the borrower.
• Loans are not permitted to be part of a private sector syndicated loan, a loan originated by a financial institution in the ordinary course of business, or a securities or capital markets. transaction.

What Restrictions Will Be Put on the Loan?

• Borrowers must refrain from using loan proceeds to repay other loan balances.
• Borrowers must refrain from repaying other debts of equal or lower priority (with the exception of mandatory principal payments) until the Main Street loan is repaid in full.
• Borrowers may not seek to cancel or reduce any outstanding line of credit with any lenders.
• The CARES Act states that the funds received must be used to retain at least 90 percent of the recipient’s workforce at full compensation and benefits until September 30, 2020. However, the guidance released today merely says that the borrower “will use the loan proceeds to ‘make reasonable efforts’ to maintain payroll and retain employees during the loan term.”
• The recipient must intend to restore not less than 90 percent of its workforce in place on February 1, 2020, and all compensation and benefits to its workers not later than four months after the end of the public health emergency related to COVID-19.
• The recipient will not outsource or offshore jobs until two years after the loan is repaid.
• Recipients may not pay dividends or buy back shares during the course of the loan or for 12 months after the loan has been paid off. At this time, it is unclear if non-public companies will be similarly restricted from making other types of capital distributions.
• Highly paid officers and executives of companies that receive a large business loan are prohibited from increasing the compensation of any employee whose compensation exceeds $425,000 or from offering them significant severance or termination benefits.
• The recipient will not abrogate any collective bargaining agreements during the term of the loan and for a period of two years thereafter and will remain neutral in any union organizing effort during the term of the loan.

What Is the Process?

The process has not yet been announced yet, but if the process for the SBA’s Paycheck Protection Program or the aviation industry and businesses “critical to maintaining national security” grant and loan programs provide any guide, we expect:

• Treasury to issue a short-form loan application, requesting:
  • Basic company information, including ownership.
  • The size of the loan needed and the intended purpose for the funds received.
  • Multiple certifications reflecting a commitment to the above requirements.
• Applicants will also likely be expected to provide the following information:
  • The economic impact of the COVID-19 health crisis on the company and the lack of alternative, non-governmental funding sources.
  • A company’s current debt levels and servicing plan.
  • Historic employment levels.
  • Financial statements.
• If the application is accepted, Treasury will provide a draft agreement to the applicant to govern the terms of the loan. The ability to negotiate terms in the agreement will likely be limited. It is unclear at this time whether Treasury will require collateral or other commitments to secure loans.

Given the broad powers and discretion given to the Treasury Department under these provisions, those wishing to obtain funding will need to also develop sophisticated political engagement strategies with the Trump Administration and Congress to support funding requests in a competitive environment, as well as minimize the risk of future Congressional, Inspector General or DOJ scrutiny.

Municipal Liquidity Facility

In addition to funding provided under the Main Street Lending Program, the Treasury Department will make a $35 billion equity investment in the Municipal Liquidity Facility, which will provide billions in direct financing to states, counties and cities to spending on essential services and coronavirus response initiatives. As many states have pushed back their tax filing deadlines, this Facility will provide funds to make up for the delay in tax revenues.

Additional Investment and Expansion of Existing Facilities

In late March, the Federal Reserve used its emergency lending authority to create three new facilities to stabilize the financial markets: the Primary Market Corporate Credit Facility (PMCCF), which serves as a funding backstop for corporate debt; the Secondary Market Corporate Credit Facility (SMCCF), which lends money to purchase corporate debt on the secondary market; and the Term Asset-Backed Securities Loan Facility (TALF), which enables the issuance of asset-backed securities backed by student, auto and credit card loans, among others.

Today, the Treasury Department approved $75 billion in CARES Act funds to implement the PMCCF and SMCCF. The Department also approved the expansion of TALF to include highly rated newly issued collateralized loan obligations.

Given the broad powers and discretion given to the Treasury Department under the CARES Act, those wishing to obtain funding will need to also develop sophisticated political engagement strategies with the Trump Administration and Congress to support funding requests in a competitive environment, as well as minimize the risk of future Congressional, Inspector General or DOJ scrutiny.

For more information, please reach out to Elizabeth Vella Moeller or Matthew Oresman, partners in the Government Law & Strategies practice at Pillsbury Winthrop Shaw Pittman LLP.

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